Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said Thursday the unwinding of monetary policy interventions needs proper timing and this remains uncertain for the Philippines at this time.
Citing experiences in recent crises, Diokno said the withdrawal of monetary interventions is the first step before raising the main policy interest rates.
“Timing of the exit remains very much uncertain at this time,” he said in a virtual briefing.
Diokno said the threat of further coronavirus disease 2019 (Covid-19) infections continues to pose a downside risk to both growth and inflation in the coming months.
“Therefore, we deem it prudent to leave some room for flexibility in policymaking to account for uncertainty and risk, especially as the situation remains very fluid,” he added.
The BSP’s policymaking Monetary Board (MB) slashed the central bank’s key policy rates by a total of 200 basis points in 2020 to help cushion the impact of the pandemic on the domestic economy.
The rate cuts are targeted to encourage lending to ensure that economic activities remain robust despite the challenging situation.
However, banks became more cautious about extending loans, taking into account the impact of the pandemic on borrowers’ capacity to pay.
Bank lending has started to recover after posting contractions since late 2020.
Aside from the rate cuts, the BSP also reduced the banks’ reserve requirement ratio (RRR) by as much as 200 basis points and allowed a certain period for banks’ lending to micro, small and medium enterprises (MSMEs) as RRR compliance.
Diokno earlier said their pandemic-focused policy interventions have reached more than PHP2 trillion to date.
He said the withdrawal of the BSP’s pandemic policy responses would also depend on medium-term inflation and growth outlooks, as well as the risks around these outlooks.
“Consistent with the BSP’s data-dependent approach to policymaking, the BSP will continue to monitor the evolution of various domestic factors, as well as emerging global developments and potential spillovers. When these developments warrant a scale-down of policy support as economic recovery gains traction, the BSP will ensure a smooth transition in winding down its time and state-bound measures,” he added.
For one, inflation sustained its latest decline, which started in September 2021 when it decelerated to 4.8 percent from the previous month’s 4.9 percent.
The rate of price increases last December slowed further to 3.6 percent from the previous month’s 4.2 percent, bringing the year-to-date average to 4.5 percent.
Although average inflation last year was above the government’s 2 percent to 4 percent target band, monetary authorities said this is expected to decline near the mid-point of the target until next year.
Diokno said among the factors that would be considered in the withdrawal of the policy interventions are “striking a delicate balance between providing adequate stimulus to the economy and preventing the build-up of inflationary pressures and risks to financial stability.”
“Given the nascent economic recovery, the priority for the BSP is to ensure the sustainability of the recovery and prevent long-term scarring effects,” he said.
He cited the importance of fiscal policy during the economy’s recovery phase, especially once the central bank starts unwinding its policy measures.
“This is to ensure that the recovery in domestic demand will not lead to excessive inflation or risks to financial stability, which could undermine the BSP’s primary price and financial stability mandates,” he said, adding that the BSP would continue to coordinate with the national government to address the pandemic’s impact on the domestic economy.
Source: Philippines News Agency